We can readily understand why investors are attracted to unprofitable companies.   For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery.   But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for $Jumia Technologies(JMIA.US)$ shareholders is whether they should be concerned by its rate of cash burn.   In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'.  We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Jumia Technologies

When Might Jumia Technologies Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn.   In December 2021, Jumia Technologies had US$513m in cash, and was debt-free.   Importantly, its cash burn was US$178m over the trailing twelve months.   Therefore, from December 2021 it had 2.9 years of cash runway.    Notably,  analysts forecast  that Jumia Technologies will break even (at a free cash flow level) in about 4 years.   Essentially, that means the company will either reduce its cash burn, or else require more cash.    The image below shows how its cash balance has been changing over the last few years.

NYSE:JMIA Debt to Equity History May 10th 2022

How Well Is Jumia Technologies Growing?

Jumia Technologies actually ramped up its cash burn by a whopping 55% in the last year, which shows it is boosting investment in the business.     That does give us pause, and we can't take much solace in the operating revenue growth of 12% in the same time frame.     Considering both these factors, we're not particularly excited by its growth profile.     While the past is always worth studying, it is the future that matters most of all.  So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Jumia Technologies To Raise More Cash For Growth?

Even though it seems like Jumia Technologies is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth.    Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business.  One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth.  By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Jumia Technologies' cash burn of US$178m is about 32% of its US$552m market capitalisation.    That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Jumia Technologies' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Jumia Technologies' cash runway was relatively promising.     One real positive is that  analysts are forecasting  that the company will reach breakeven.    While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Jumia Technologies' situation.     An in-depth examination of risks revealed 2 warning signs for Jumia Technologies that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.